A great many nonprofit organizations that received stimulus funding from the federal government during the pandemic are now finding themselves facing unexpected audit requirements.
Nonprofits that expended $750,000 or more in federal funds in a single fiscal year are subject to the single audit, named after the Single Audit Act of 1984. These complex and often expensive audits add a major compliance burden. Many charities and other nonprofit organizations are discovering they’re not prepared for those requirements, and are turning to their accountants for help to make sure they can meet the deadlines and not fall afoul of the federal government.
“We are seeing a lot more nonprofits that have not previously been subjected to the single audit requirements having to address the issues around that, more now than ever before,” said Lee Klumpp, a national professional practice partner at Top 10 Firm BDO USA who specializes in nonprofit, government and health care clients.
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“A lot of ones that are now being subjected to the single audit requirements have never been required to have them in the past because they never received federal funding,” said Klumpp. “Because of the nature of the stimulus funding, in a lot of cases, we’re seeing more of that, especially for organizations that provide health care services.”
Nonprofits need to make sure they are abiding by the requirements that will be a new experience for many organizations.
“A lot of it is just knowledge about the strings that are attached to the federal funding,” said Klumpp. “Depending on what program we’re talking about, there are requirements around allowable costs and allowable activities, and in some cases, period of performance. That’s usually pretty clear, but in other cases, there are eligibility as well as other compliance requirements.”
While nonprofits that are accustomed to receiving large amounts of federal funding may be all too familiar with the single audit requirements, that won’t be the case for many others this year. “Those organizations that are involved in this funding stream on a regular basis have built up internal controls processes and education processes for their teams to know what they have to do,” said Klumpp. “Others who got the funding, whether they applied for it, or it was just given to them, are having to start from ground zero where they could have never done this before. It’s a challenge for organizations.”
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Nonprofits that don’t follow the requirements may need to return funds if they have misused them, or face other consequences.
“It’s hard to say because the facts and circumstances could be different,” said Klumpp. “It could be anything from — worst-case scenario — returning the funds to providing additional support and evidence that the funds were used for their intended purpose,” said Klumpp. “It’s really hard to say what’s going to happen. We know with some of the SBA funding sources, PRF, and some of the others that the federal agencies that are running those programs are talking about performing audits, doing reviews and other types of things to make sure that the funds were used as intended.”
The federal government has been trying to pursue fraudsters who have reportedly stolen billions of dollars in pandemic aid from widely used sources like the Paycheck Protection Program, Economic Injury Disaster Loans and expanded unemployment insurance, but in many cases the fraud is hard to trace or was perpetrated by criminals located outside the U.S. Nonprofit fraud doesn’t appear to have been rampant during the pandemic, but nonprofits simply may not be prepared to account for all their spending.
“A lot of not-for-profits that I’ve run into are actually having audits and doing the things they’re supposed to be doing,” said Klumpp. “The folks who did what they were supposed to probably have nothing to worry about. There probably are a few bad actors. Those will hit the headlines. The word that we’ve been hearing is that the federal agencies will try to find the bad actors and they’ll probably make examples of them. The folks that are using the money as intended, if they follow the guidelines and the FAQs, they’ll be OK.”
Nonprofits need to be aware of the $750,000 annual threshold that could trigger a single audit, but there are other factors to keep in mind as well.
“That tells them whether they need to have the single audit done,” said Klumpp. “The stimulus funding that they received comes with a lot of requirements. It’s not free money. It's supposed to do certain things to pay for COVID-19-related expenditures, pay for payroll to maintain employment, provide services to people who don’t have the funds to pay for those services, or provide health care for the uninsured related to COVID. All those different programs have different rules and regulations. Understanding the rules and regulations and what they have to do to comply is paramount.”
Even for CFOs who have gone through the single audit process in the past, there’s a need to familiarize themselves with the latest requirements.
“All these programs are new for the most part,” said Klumpp. “There are some adaptations of some current programs, but a lot of them are new. That means they have new rules and new guidance. We’re constantly coming up with ideas to help our clients on questions they've asked that we've never seen before.”
BDO and other accounting firms have been helping their clients make sure they follow the rules and don’t run into trouble with the Federal Emergency Management Agency, the U.S. Department of Health and Human Services, and other agencies.
“BDO and a lot of our competitors have been assisting our clients and prospective clients where we can in trying to navigate this new guidance and new regulations and trying to understand what they need to do," Klumpp said. “I think there’s a large opportunity for firms that have the expertise to actually assist nonprofits and for-profits alike in trying to make sure that they have the right internal controls and reporting models in place, depending on what their funding source is. It could be single audit because they got money from FEMA or HHS, or it could be some of the issues that go around with PRF, which is an HHS program. It’s important that everyone understand the rules and make sure they’re following them because it could be problematic, and I think firms can help them do that.”
